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In South Africa, listed real estate companies are referred to as Reits, which is an abbreviation for Real Estate Investment Trusts. A Reit is a security that sells like a stock on an exchange. Reits own, and often run, income-producing properties.
You can buy Reits through a stock broker or you can invest in a collective investment scheme, like a unit trust fund or pension fund, that in turn buys Reits.
1. Superior returns
The first, and most obvious, reason to include SA Reits in your investment portfolio is that they have consistently produced returns that have outpaced equities in general as well as bonds.
A table of total returns, compiled by the South African Reit Association, shows that these securities have produced better returns than Johannesburg-listed shares and bonds – by a considerable margin in recent years.
2. Income and capital gains
The advantage of Reits is that they aim to deliver capital gains and an income. Figures, from Grindrod Asset Management, show that in years when prices have fallen, income has still been generated.
As Investopedia notes, Reits are a dividend-paying means of participating in the real estate market.
South African Reits must pay at least 75% of taxable earnings available for distribution to investors each year. “As SA REITs earn income from property lease income that escalates each year, they have relatively predictable earnings. So you know what to expect from your investment with reasonable certainty,” says the SA Reit Association.
3. Diversification of investment risk
The jury is out on whether Reits globally are a good diversifier of risk. This is because prices tend to move in line with equities in general. An in-depth study on Reits published earlier this year finds that Reits “in most countries in recent years show greater volatility and correlation with the broader market indices than before the global financial crisis”.
However, Ian Anderson, chief investment officer at Grindrod Asset Management, says correlation of returns with the broader market is low in South Africa. “Adding Reits to an equity portfolio heightens return for the same level of portfolio volatility,” he says.
Although Reits can take on debt, this is limited. The SA Reit Association says South African Reits must keep debt below 60% of gross asset value.
4. Access to large property assets
A Reit invests in property or property funding. Reits invest in shopping centres, warehouses, office complexes and other large buildings. In some countries, Reits also invest in residential property, like large apartment blocks.
Opting for listed property allows you to buy units of stock that represent an investment in a large asset. So, you can have a stake in shopping centres for thousands of rands rather than millions of rands.
Commercial, retail and industrial properties have benefits that residential property lacks, for example a commercial tenant can be less hassle than an individual who is renting from you. Plus, there are different factors driving returns from these types of properties.
For example, South African shopping malls in rural areas can benefit from a monopoly situation. You could take advantage of this by investing in Rebosis, a Reit listed on the JSE that has shopping centre interests off-the-beaten-track.
5. Protection of your money
A lot of intelligent people get ensnared in property syndicates and lose a lot of money, sometimes all of their money. These syndicates are often marketed and run by organisations that seem to be reputable and above board.
A prime example is the recent case of the Louis Group property syndicates, in which investors from South Africa and elsewhere ploughed money into property-owning companies registered in a low-tax jurisdiction. The authorities are investigating the disappearance of funds (for more on the syndicates run by Capetonians, see: God made us do it: Louis Group property operators).
A much better way to invest in hotels, office blocks and other non-residential real estate is through Reits because there are extra layers of oversight, not only from regulatory authorities but from investment professionals – like analysts. Reits are more transparent than other forms of collective investment scheme that aim to pool investors’ funds to buy large buildings.
6. Liquidity
Some Reits are easier to buy and sell quickly than others. However, in general it should be easier for you to offload Reits in a hurry if you need to unlock some cash – certainly far faster than you could market and sell a large building. As the SA Reit association notes, between R3bn and R5bn in Reits changes hands monthly on the JSE.
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